The Personal Information Protection Act under the Japan Law has become very important for Japanese companies when a business transaction with a US company involves handling individuals’ information such as call center services. Under the Act, “personal information” means “information regarding a living individual that contains such name, date of birth, or other descriptive information as will enable identification of the individual.” The Act applies to any “business handling personal information,” and a breaching company is subject to a criminal penalty and/or a fine. Although forming a written contract is not as common as companies in the U.S., nondisclosure agreements are commonly used with employees, independent contractors and in contracts involving the company’s customer list. Furthermore, with the increasing number of people who leave companies before the retirement it is becoming more common for Japanese companies to provide non-compete agreements with employees.

Japanese subsidiaries of the US that hire rotating staff from their home country may face lawsuits over rotating staff in discrimination against U.S. citizen employees. Rotating staff are usually citizens of the home country, hired by their parent company but assigned to the U.S. (overseas) for a certain period. The pay differentials and different type of promotions between rotating staff and U.S. citizen employees have been challenged in the past. Based on the past cases related to employment discrimination against U.S. citizen employees, however, it seems clear that treating rotating staff as employees of their parent company, as opposed to their U.S. subsidiary, will decrease the parent’s exposure to discrimination claims.

Like the U.S., Japan has gone through a serious recession in the past year. It seems, however, that the fact that the population is shrinking faster than the slow GDP growth – Japan has a higher GDP growth per capita than the United States, even though the US GDP growth is higher than Japan's— may help them recover quicker than the rest of the countries in the world. With the sharp decline in Japan’s population and an extremely low level of immigration, they are now concerned about where their businesses go in the next twenty years. The first question is whether the government should put emphasis on nurturing business that create long-term domestic demand, such as in medical services, nursing care and information technology. There is no question Japan as well as U.S. has to take steps internally to try to stimulate demand and to look at how to diversify their own economies. The second question is whether Japanese companies should continue to expand their businesses overseas that allow them to bring extra revenues into Japan. It seems clear that they need to continue relying on export business to offset the sharp decline in domestic demand. In the past couple of years, at least, rapid export growth played a crucial part in boosting industrial production and so company profits.

In the U.S., the discrimination laws that have been established by EEOC may come into play when an employer discharges temporary workers. For example, employers will be legally responsible as “an employer” for temporary workers who were hired through a temporary agency, as long as the employers exercise control over the temporary workers’ assignments. However, temporary workers are not subject to the same degree of protections against discrimination if they are treated as “an independent contractor.” A temporary worker is treated as an independent contractor if an employer had no ongoing relationship with the worker, did not pay the worker based on the hours worked, and had no authority over hours, assignments or other aspects of the means or manner in which the work was achieved. Unfortunately, most of the temporary workers hired by Japanese companies in the U.S. are considered employees. That said, employers should be aware of the discrimination laws when they discharge temporary workers, just as they are with regular employees.

According to the Asahi Shimbun posted on October 31, 2008, (http://www.asahi.com/english/Herald-asahi/TKY200810310096.html) overall tax revenue for fiscal 2008 will fall more than 5 trillion yen short of the government's 53.5-trillion-yen estimate, due mainly to poor corporate performances. A stronger yen has hurt export revenues, and the U.S. economic downturn has been blamed for the poor performances. However, Japanese public companies are sitting on cash reserves of more than 60 trillion yen. What that means is that those Japanese companies can afford to acquire other companies, which will provide them with the chance to expand their businesses overseas while many U.S. companies are facing the financial crisis.

In Japan, some courts have held that a termination clause will be considered to last for an indefinite term even if parties have renewed the agreement several times regardless of whether the agreement was for a definite term and had a non-renewal clause. Japanese companies often prefer a termination clause in which the agreement is automatically renewed without notice after a certain period. This may be expected even though the provision requires a party to give notice of its intention not to so renew or to renew prior to expiration of the term. They view the termination clause as a token of their relationship with the other party. On the other hand, U.S. companies tend to look at the termination clause as a tool for allowing them to get out of the agreement in which each party may terminate the agreement without cause and without prior notice or each party may refuse to renew the agreement by giving notice prior to the expiration date. This may be because the U.S. companies value the language of an agreement over their instinctive sense of trust and view any new transaction with a short term goal, while the Japanese companies intend to nurture their relationship and set out a long term goal with the U.S. companies. Accordingly, particular attention should be paid to whether a party’s intent is beyond what is stated in the agreement especially if the Japanese law is controlling.

The main purpose of an indemnification clause is to minimize risks of incurring losses if a seller does not perform in accordance with the obligations of an agreement or if the seller breaches what it disclosed in the representations and warranties.Thus, the indemnification clause will provide a buyer with some degree of legal protection, in the unlikely event that any legal issues arise with respect to the seller’s business activities especially in a M&A transaction. Below are the important points you should keep in mind when you review an indemnification clause in the M&A transaction.

1. Scope of Indemnification - a) The clause should cover all kinds of actions, such as claims, demands, costs or judgments against you. This would include a settlement or a court award, directly or indirectly incurred in connection with any inaccuracy, misrepresentation or default or warranties given by the seller in the Agreement. b) The clause should cover items that are disclosed in the seller’s representations and warranties for which the seller retains responsibility after the closing.

2. Duration - a) Generally, an indemnification time period should be one to three years after the closing. Exceptions may be made for environmental and tax liabilities, for which the time period may be the applicable statute of limitations.

3. Indemnifying parties - a) The indemnification clause must include proper parties, that includes third parties, such as shareholders, agents, employees and affiliates who could possibly be subject to the said transaction.

4. Basket - a) The seller could be liable for the total amount of the losses, but does not have liability until the amount of the buyer’s losses exceeds a certain sum when there is a basket of a certain sum. The amount of the basket should be carefully negotiated through the buyer’s due diligence investigation.

5. Escrow - a) The buyer may require that a portion of the purchase price be held in escrow to ensure that there are enough funds available to satisfy the seller’s indemnification obligations. The amount of the escrow should be carefully determined after examining the value of the property /company.

6. Limitation on Liability and Remedy - a) For the seller, it is important to limit its post-closing indemnification obligations in several ways: 1) The seller will try to limit the time period after the closing for which it has indemnification obligations; 2) the time period should be based upon a reasonable period of time within which a third party would make its claim, 3) the seller will try to impose a cap on the total amount of its indemnification liability, and 4) the seller will try to negotiate a basket on its indemnification obligations, in order to eliminate small indemnification claims. b) For the buyer, it is important to renegotiate the terms and conditions or hold back a portion of the purchase price, if the seller does not have sufficient funds available to satisfy the seller’s indemnification obligations. The buyer also needs to secure its interests or prospects of future business, after closing, and take into consideration the seller’s potential liabilities, which may only have been revealed after the closing.

The language in a Force Majeure provision focuses on events that make it impossible for a company to provide services due to acts of God, war, terrorism, government regulations, disaster, strikes, fire, civil disorder, curtailment of transportation facilities, or other similar cause beyond the control of the company. Under that provision, some companies are under an obligation to use their best efforts to continue to perform or cure. For example, you, as a service provider, might be forced to cure or perform your services even after a typhoon hits a city where your service facility is located. Others are, however, required to use only reasonable best efforts, commercially reasonable efforts or reasonable efforts. Obviously, the best efforts impose a higher level of obligation on a service provider than any other efforts. If the other company insists, during negotiations, that you be required to use "your best efforts" as opposed to "commercially reasonable efforts", you should make yourself aware of the subtleties provided in the Force Majeure provision.

In a cross border transaction with Japanese companies, Western/American companies are often confused by how the Japanese approach business transactions; the Japanese do everything they can to retain the relationship for operating their businesses abroad, despite their passive predisposition. In addition, Japanese business people tend to emphasize trust over formal written agreements in order to maintain a good business relationship. As a result, the Japanese put less effort into how they should craft an agreement than their effort of how they finalize a deal, and it takes time to make them understand the need for certain provisions in the agreement. Unfortunately, Western business people often interpret their approach as a flaw of their business model. Any cross border business transaction requires understanding of the other’s culture and patience. Western business people are also encouraged to recognize these differences and nurture their relationship with Japanese companies besides their binding relationship under the agreement.

There has been a common question relating to acquisition transactions; how do you determine seller’s liabilities? Only a half portion of the seller’s liabilities can be discovered by a buyer during its due diligence investigations, but the other half could be covered by the seller’s representations and warranties provided in a purchase agreement. For example, if the buyer finds out that the seller has not complied with local regulations with respect to its labor/employment, the buyer’s best bet is to hold a portion of the purchase price in escrow and give the seller a promissory note for that portion but retain the right to offset the promissory note to satisfy the buyer’s indemnification claims.

井上奈緒子

Naoko Inoue Shatz is a U.S. lawyer who has extensive business experience in Japan, and she has a wide range of practice experience involving cross border matters and legal disputes between U.S. and Japan. Her dedication and responsiveness in addition to her experience has often helped corporate clients quickly uncover challenging issues and develop a sound business relationship. 井上奈緒子は日本でビジネスの経験を持つ米国の日本人弁護士で、アメリカと日本の2国間にかかわる一般法務から法的紛争にわたって幅広い経験を持ちます。さらに専心さと対応力に関しても多くのクライアントから評価を得ており、国際商業取引業務においてクライアントとは確実な関係を築きあげてきています。Read More

Calendar

Quicksearch

Archives

Legal Disclaimer -お断り

All data and information provided on this website is for informational purposes only and should not be relied on as legal advice. Nothing transmitted from this website constitutes the establishment of an attorney-client relationship between you and any attorney mentioned on this website.